Navigating the ins and outs of taxes can often become complex, but it is critical for professionals who are self-employed to understand the finer points of self-employment tax. This article is built to help clarify what self-employment tax is, who it applies to, and how to approach filing taxes as a self-employed individual.
What Is Self-Employment Tax?
Self-employment tax is a type of tax imposed on self-employed individuals and business owners to compensate for not having to pay taxes for Social Security and/or Medicare benefits in the same way an employee would. It covers both the employer’s and employee’s share of the taxes, since the self-employed person is considered both the employer and the employee.
Who Does Self-Employment Tax Apply To?
Self-employment tax applies to anyone who works for themselves, including freelance and gig workers, independent contractors, and small business owners. Individuals must pay this tax if they earned more than $400 as a sole proprietor, independent contractor or self-employed individual.
How to Prepare for Self-Employment Tax
Self-employed individuals must remember to set aside money each month in order to pay self-employment taxes. To make the process easier, self-employed individuals should consider setting up estimated tax payments, creating a budget for themselves, and calculating estimated taxes in advance. Additionally, a tax professional can be a valuable resource for self-employed people who need help with filing and preparing taxes.
Understanding Self-Employment Tax Is Essential
Although tax planning and filing can be cumbersome, taking the time to understand and prepare for self-employment tax can save a significant amount of money in the long run. Being aware of the rules and regulations such as estimated payments, tax deductions, and reporting requirements can go a long way towards protecting your business.